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James A.

Hall
Accounting Information Systems, 4th. Ed.

Chapter
GL, Fin. Rept. & MRS

CHAPTER 8

THE GENERAL LEDGER, FINANCIAL REPORTING,


AND MANAGEMENT REPORTING SYSTEMS
This chapter is concerned with the part of the AIS that ties all of the transaction processing systems
together and handles financial reportingthe general ledger.
The first topic discussed is the role of coding schemes. This is probably new to you. Then the
general ledger system is presented, followed by the financial reporting system.
Historically, the accounting system was the first, and for a very long time the only, information
system in most organizations. The last part of this chapter discusses a much broader information
systemthe management reporting system (MRS) which provides both financial and non-financial
information to aid managers to plan and control business activity. Of particular note is the fact that
an MRS is discretionaryat least in the sense of not being mandated by any authoritative body. It
would be hard to argue, however, that an organization is free to choose not to collect and report
information that helps the organization meet its goals and objectives.
The objectives of this chapter are:
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to understand the purpose of data coding and to be able to identify the respective features,
advantages, and disadvantages of the various numeric and alphabetic coding schemes;

to understand the operational features of the general ledger system, the financial reporting
system, and the management reporting system;

to be able to identify the principal operational controls governing the general ledger,
financial reporting, and management reporting systems;

to understand the management decision-making process;

to recognize the role of management principles in the design of information systems;

to understand the effect of decision type and management level on information needs;

to know the difference between structures and unstructured decisions;

to know the different report types and the attributes common to all reports;

to understand the elements of a responsibility accounting system; and

to be aware of the behavioral issues in management reporting.

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 8-1

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
GL, Fin. Rept. & MRS

Notes
I.

Data Coding Schemes


The first part of the chapter discusses a topic which has
relevance for all of the transaction cycles but has been delayed
until now so as not to distract attention from the objectives of
the other cycles. In presenting the general ledger system as
the hub of the overall information system, the role of coding
schem es is easier to present. Fig. 8-1, on page 409, illustrates
the relationship of the G LS to the othe r elements of the overall
information system.
A.

A System without Codes


This section is designed to highlight the extra
recordkeeping required and the potential for errors in
a system without cod es.

B.

A System with Codes


The same system, with a simp le cod ing sche me in
place, is illustrated. Note the discussion of the
benefits of coding.

C.

Numeric and Alphabetic Coding Schemes


Various types of codes exist. Many of them are
familiar to you. None is perfect. What is chosen for
a given system m ust work in its enviro nment. This
includes compatibility with procedures and as much
information content in the coding scheme as is
practical.
There are several different types o f codes discussed.
Be sure that you understand the advantages and
disad vantag es of:

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II.

sequential codes,
block co des,
group cod es,
alpha betic cod es, and
mnemo nic cod es.

The General Ledger System


As you study this material on the general ledger, keep in mind
what you know already about a manual GL system.

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 8-2

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
GL, Fin. Rept. & MRS

Notes
A.

The Journal Voucher


A journal voucher system has replaced the general
journal in ma ny organizations. Fig. 8-3, on page
415, shows a sample vo ucher. No te the informatio n it
contains. There is more control over a JV system
than a traditiona l general journal.

B.

The GLS Datab ase


When you consider the information that must be
collected in a general ledger system, you should not
be surprised by the number of files that make up the
database:

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the general ledger master file,


the general ledger history file,
the journal voucher file,
the journal voucher history file,
the respon sibility cen ter file, and
the budg et ma ster file.

Each of these is well described in the text. Be sure


you are clear on the distinction between master and
history files.
C.

GLS Procedures
Fig. 8-5, on page 417, is a flowchart of the GLS
update process. It is very simp le and should contain
no surprises.

III.

The Financial Reporting System


You are well aware that GAAP [generally accepted accounting
principles] and legal requirements are the driving force behind
our financial reporting system. This is the focus of the current
chapterthe mandated financial reporting.
A.

The Financial Acc ounting Pro cess


This section discusses the accounting process in terms
of eleven steps. This should confirm what you
already know about the accounting process. The text
also discusses three phases to describe the frequency
at which different events occur. See Fig. 8-6 on page
419.

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 8-3

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
GL, Fin. Rept. & MRS

Notes
IV.

Controlling the GL/FRS


Although the control concerns in the general ledger/financial
reporting system are more limited because they involve only
the acc ounting reco rds, the possible problems are very serious.
If errors are permitted in the account balances, thereby leading
to inco rrect financial statements, great risks exist.
A.

GL/FRS Control Issues


The discussion of control techniques again follows
the approach of SAS 7 8. Although there is no
summary table, you should be able to construct your
own.

V.

Computer-Based GL/FRS
Two approaches to automating the GL/FRS are presented:
batch processing with sequential files and batch with direct
access files. Financial rep orts are norm ally perio dic;
therefore, there is little need for real-time systems.
A.

Legacy GL/FRS Using Batch Processing and Flat


Files
Fig. 8-9, on page 424, shows a batch GL/GLS system
that uses sequential files. Pay particular attention to
the strengths and weaknesses, this can help when you
need to contribute to the design of a new system for
yourse lf or a client.

B.

Reengineered GL /FRS Using Database T echnology


Fig. 8-10, on page 426, shows a batch GL/GLS
system that uses databases. Again, pay particular
attention to the strengths and we aknesses.

VI.

Factors That Influence the MRS


One of the greatest benefits of information technology has
been the automa ting of the routine boo kkeeping tasks that in
the past overwhelmed accountants and their staff. Now, as
information p rofessio nals, they have the time and reso urces to
play a much greater role in helping management make good
business decisions. This section presents the management
reporting system as the significant supp ort system that it is.
A.

The Decision-M aking Pro cess


You are pro bably familiar with the decision-making
process from other courses. This section discusses the
process as being made up of four steps. Do not take

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 8-4

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
GL, Fin. Rept. & MRS

Notes
this material for gra nted. R ead carefully all that is
involved in eac h of the four steps:
1.
2.
3.
4.

identification of the problemthis is often


more difficult than expected;
evaluation of the alternative solutions;
implementation of the best solution; and
a post-implementation review.

The example developed in the text is very good.


Follow the reasoning. Of particular value in future
chap ters will be an und erstand ing of a p ostimplementation review.
B.

Management Principles
Depend ing on your experience with management
courses, this section may be a review or it may be
eye-opening. Of particular value are the little sections
implications fo r the M RS.

C.

The impo rtance of the formalization of tasks


cannot be ignored. Control and evaluation
are difficult if tasks have not be en well
defined.

The link between responsibility and


authority should be clear, but is not always
so.

Span of control has a great deal of affect on


a managers need for information and the
types of information that the manager nee ds.
Be aware of the factors involved. See Fig.
8-12, on page 433.

Managem ent by excep tion focuses a


managers attention on areas requiring
attention.

Management Function, Level, and Decision Type


Chapter 1 introduced the idea that a managers need
for informationquantity, frequency, level of
aggregationis affected by the managers position in
the organization and the type of decisions he or she
makes. This part of the chapter discusses four
categories of planning and control decisions:

strategic planning decisions made by toplevel manage rs;

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 8-5

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
GL, Fin. Rept. & MRS

Notes

D.

tactical p lanning decisio ns made by midd le


manage rs to implement strategic plans;

manage ment control decisions that raise


some concerns about distinguishing between
the manage r and the unit he or she manages;
and

ope rationa l contro l decisio ns which aim to


assure that the organization o perates in
acco rd with p reestab lished criteria. Table 82, on page 436, contrasts decision
characteristics and d ecision types.

Problem Structure
It should not be surprising that there are different
types of prob lems. T he text d iscusses three elements
or aspects of problems that determine whether a
problem can be regarded as structured or
unstructured. These elements are:

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E.

the data related to the situation;


the pro cedures or decision rules used in
solving the problem; and
the objectives that the decision maker has
for solving the problem.

i.

W hen all elements are known with certainty,


the prob lem is structured. The example is
quite clear. W hen all elements are known,
the solution to the problem is clear and can
be p rogra mmed within trad itional data
processing systems.

ii.

Unstructured problems involve unce rtainty


on one or more of those elem ents. W hen this
is the case, the solution is not obvio us.
Judgement is imp ortant.

Typ es of M anagement Rep orts


This section discusses the characteristics of
managem ent rep ortsinformation comm unicated to
managers regardless of the form it takes. The
objectives of reports are discussed first followed by a
description of programmed (scheduled and ondemand) repo rts and ad hoc reports. One of the
greatest benefits of new database management
systems is the ease with which mana gers ca n obtain
answers to ad hoc questions themselves, without the

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 8-6

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
GL, Fin. Rept. & MRS

Notes
assistance of an information p rofessio nalthe ability
to get the information now.
The discussion of report attributes expands on ideas
introduced in chap ter 1. R ecall the reference to
Statem ent of Financial Accounting Concepts
Num ber 2.
F.

Responsibility Accounting
Responsibility accounting is based on the concept
that managers are accountable only for items that they
can control. This section may revisit material from
your cost accounting or managerial accounting
course. It emphasizes the importance of setting
financial goals (that nasty word budget, again) and
measuring and reporting performance.
Part of the responsibility question leads to the
identification of three types of respo nsibility centers:
cost center, pro fit centers, and investme nt centers.
Even if you have met these concepts before, be sure
you understand them. They have definite implications
for information systems.

G.

Behavioral Considerations
This chapter has discussed the management reporting
system and how it can help managers and
organizations make better decisions. But, decisions
are made by people and people are not as rational as
programmed information systems. This last section
raises several q uestions of a behavioral nature.
Goal congruence refers to the need to m atch the goals
of individuals (and the related measures of
performance) to overall organizationa l goals.
As information systems have become more complex
and soph isticated, the po ssibility arises that too much
information is generated and provided to decision
makersa situation called information overload. [This
may occur in some of your accounting courses!!!] In
add ition, if inappropriate performance measures are
selected, inap propriate decisio ns are m ade. Read all
of this material carefully.

Review Questions for Chapter 8: 1-43


Discussion Questions for Chapter 8: 1-8, 10, 12, 13, 15-17, 21-24

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 8-7